Emerging Market Consumers Tighten Their Belts

22 November, 2011

Eastern European women are buying less make-up and their menfolk are easing up on the beer. These are just two of the glitches in emerging markets thrown up in latest reporting season.

But these are the very markets which – for the highly-exposed consumer products industry in particular – have become a byword for growth and a repository for much of their capital and resource allocation.

L’Oréal, the cosmetics group, and Reckitt Benckiser rang the alarm bells loudest. Rakesh Kapoor, the new chief executive at the household goods and drug-maker, told investors: “The fact is, this year [emerging] market growth has been softer than in prior years.”

For its part, L’Oréal reported a 1.5 per cent year-on-year drop in like-for-like sales in Eastern Europe in the third quarter, as well as “deceleration” in Brazil. Direct sellers Avon and Natura also saw softening in Latin America’s biggest market, although partly due to one-off disruptions.

“There have most definitely been signs of deceleration in emerging markets’ growth,” says Eva Quiroga, an analyst with UBS. She forecasts that overall growth in these markets – which account for between 30 and 50 per cent of European consumer group’s sales, but typically less for their American peers – will tempered from round the mid-teens to the low-teens.

Eastern Europe has been a particular stumbling block. Brewers, facing the added handicap of a huge tax increase in Russia as part of its efforts to crack down on alcohol abuse, also point to the straitened consumer.

Jrgen Buhl Rasmussen, chief executive of Denmark-based Carlsberg, points to inflation on basic foodstuffs such as bread, pasta and rice. “This has been holding consumers back a little in 2011,” he said after unveiling a 9 per cent drop in organic beer volumes in Eastern Europe in the third quarter.

Even Unilever – doyenne of the emerging market champions, which makes more than half its sales in the developing world and generated strong growth from the region last quarter – sounded a note of caution on Eastern Europe.

The maker of Dove shampoo and Flora margarine dubbed it the most challenging emerging market, noting “tough” market conditions in Russia in particular, with inflation running at an annualised 9-10 per cent, and a high level of price promotions.

High inflation is also behind the tempered growth in Brazil, analysts say. In addition, Brazilian consumers are more indebted – which bodes still less well for big-ticket items such as TVs and cars, notes Michael Steib, analyst at Morgan Stanley.

Conversely, he expects next year’s increase in minimum wages to translate into better volume sales of consumer products such as shampoos and beer – a point also highlighted by AB InBev, the world’s biggest brewer, which has a near-70 per cent market share in Brazil.

Fellow brewer SABMiller, meanwhile, saw volumes in China slump in the second quarter, down 1 per cent year-on-year, compared with a 14 per cent rise the previous quarter. However, quarterly numbers are lumpy and poor weather also took a toll.

While Mr Steib concurs that, lumped together, emerging markets will slow down next year, he points out that performance will vary greatly by country, with India, Indonesia and China still showing strong growth.

More worrying to him is the “irrational competition” faced by the sector, of which the longest-running and most glaring example is the Indian soap wars between Procter & Gamble of the US and Unilever. The two companies have been locked in battle for supremacy in India’s detergent market, deploying aggressive price cuts, advertising campaigns and even legal action in their bid to claim the top slot.

But competition is heating up across the board as “everyone is chasing that last Indian and Chinese consumer because they cannot generate growth in Western Europe,” says Mr Steib.

This has created several pressure points in the supply chain. Increased demand means higher costs for media and logistics, as well as talent, all of which squeeze margins – a trend already in evidence in the last reporting season.

This also attests to the rise of domestic competitors. Different financial models often enable them to operate on wafer-thin operating margins, giving greater flexibility to launch price wars.

Even with discounting, another analyst points to the fillip provided in the latest set of results by price increases, taken to recover input costs. With many input prices now going into reverse, this may be difficult to repeat – leaving top-line growth more reliant on volume growth.

Says Ms Quiroga: “Beyond that, the question will be, in a weakened consumer environment, will these guys continue to raise prices?”

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Emerging Market Consumers Tighten Their Belts

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